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Layoffs, other cuts linked to CEO pay hikes

September 07, 2003|By Kathy Kristof, Tribune Media Services.

Chief executives of companies that had the largest layoffs and most underfunded pensions and that moved operations offshore to avoid U.S. taxes were rewarded with the biggest pay hikes in 2002, on average, a new report has found.

The study, released last month by United for a Fair Economy in Boston and the Institute for Policy Studies in Washington, D.C., used methodology that some companies criticized as misleading. Still, the report may add to the furor over executive pay.

Carol Bowie, director of governance research at the Investor Responsibility Research Center in Washington, D.C., said the study "demonstrates the flaws in how some incentive pay plans are constructed."

Many plans "are fairly short-term in nature, and all of these things--layoffs, underfunded pensions and going offshore to avoid taxes--can pump up short-term results," Bowie said.

While the median CEO pay increase was 6 percent in 2002, median pay rocketed 44 percent for chiefs of the 50 companies that announced the biggest layoffs in 2001, according to the study.

At the 30 companies with the greatest shortfall in their employees' pension funds in 2002, CEOs that year made 59 percent more than the CEO median reported in BusinessWeek's annual executive compensation report, according to the study.

Among the 24 companies with the most offshore subsidiaries in tax-haven countries, CEOs earned 87 percent more than the median pay for the last three years, the study concluded.

In the case of tax havens, CEO pay was measured over a longer time frame because the decision to use tax havens is considered a long-term move rather than a short-term step, said Chris Hartman, research director for United for a Fair Economy.

United for a Fair Economy, founded in 1994, says its mission is to "focus public attention on economic inequality." The Institute for Policy Studies, founded in 1963, calls itself "an independent center for progressive research and education."

At the top of the study's list of companies that announced large layoffs in 2001 was Hewlett-Packard Co. in Palo Alto, Calif., which set plans to shave nearly 26,000 jobs that year. In 2002, HP's CEO, Carly Fiorina, saw her pay rise 231 percent from 2001, to $4.1 million, the study said.

An HP spokeswoman "strongly disputed" the implied correlation, saying that Fiorina's base pay has remained constant. All employees, including the CEO, received a bonus in 2002 because the company met certain performance goals, noted the spokeswoman, who also added that Fiorina turned down a merger-related bonus.

Some experts noted that CEO pay would be expected to reflect the leader's ability to make a company more efficient and boost shareholder value, even if that required layoffs.

"The key question is: Did the executive get a bonus for doing layoffs, or did he or she get a bonus for cutting costs and riding through the tough times?" said Matt Ward, president of Westward Pay Strategies in San Francisco. "Obviously, it is uncomfortable for the executives on this list, but to determine whether the link is a fair one, you'd have to look at these companies on a case-by-case basis."

The study found that AOL Time Warner Inc.'s former CEO, Gerald Levin, took home the biggest 2002 percentage pay increase--a 1,612 percent hike--in the wake of 4,380 layoffs in 2001.

An AOL Time Warner spokeswoman said the data were misleading. Levin's cash compensation remained level in 2002, but he exercised stock options worth more than $19 million, boosting his total pay to nearly $21 million, the company said. Those stock options, which accounted for the bulk of his pay, would have expired if not exercised in 2002.

According to the study, CEOs at 22 of the companies with big layoffs in 2001 saw their compensation drop in 2002. Those included the top executives at Motorola Inc., Solectron Corp. and Cisco Systems Inc.

The study looked at layoffs in absolute numbers, not as a percentage of a company's total staff. That was likely to result in a big-company bias, and big companies tend to pay their executives more than smaller companies simply because of scale, pay experts said.

Similarly, the companies with the largest pension shortfalls, in total dollar terms, also are some of the biggest U.S. companies, which would be expected to pay their CEOs more than smaller companies that may have larger pension shortfalls as a percentage of total liabilities.